Is it too late to hop on board AB InBev?

Opinion: There is room for growth here, but also cause for concern

GRAND BLANC, Mich. (MarketWatch) — What’s more American than enjoying a hot summer day with hamburgers on the grill and a cold Budweiser chilling in the cooler? Except, you may not realize that the Budweiser you are enjoying is actually not American at this point. Rather, it is owned by an international brewing conglomerate with its headquarters in Belgium. The stock has had a good run in 2014, but can it continue?

Anheuser-Busch InBev
BUD, -0.28%
was created in 2008 with the merger of Belgium-based InBev and U.S.-based Anheuser-Busch, and it is currently the largest brewer in the world. Following its acquisition of Grupo Modelo, the company’s portfolio contains five of the world’s top-10 selling brands of beer, and has 17 brands with retail sales over $1 billion. AB InBev is truly an international company, with its roots in Belgium and the U.S., but also significant exposure in Latin America. Brazil, home of this year’s World Cup and the 2016 Summer Olympics, is AB InBev’s second-largest market behind the U.S. Another push is in China, where market share is much smaller, but business prospects are promising, as net income has recently increased by nearly 50%.

The financials

AB InBev has relied on a strategy of aggressive acquisition to grow revenue and margins. One look at their financials and you can see how successful the company has been in implementing their strategy. They have rapidly grown revenue and earnings per share (EPS) over the past five years and have an extremely high profit margin given the company is considered a consumer staple.

Anheuser-Busch Inbev

Molson Coors

Heineken

Sales growth, five-year

12.9%

-2.5%

6.0%

EPS growth, five-year

35.3%

7.8%

40.9%

.9Gross profit margin — TTM

59.7%

39.9%

36.5%

Operating profit margin — TTM

46.7%

16.6%

8.3%

Source: Morningstar, Charles Schwab. Data as of 6/27/2014.

Cash flow has suffered in the short-term due to its acquisitions of Grupo Modelo in 2013 and Oriental Brewery in South Korea earlier this year. Nevertheless, their aggressive strategy to invest in brands with positive cash flow in emerging economies should continue to pay off.

Dividend growth

Currently, the dividend yield is at 1.75%, but AB InBev has been aggressively increasing their dividend over the past five years as the five-year dividend growth rate is over 50%. In 2010, AB InBev paid a yearly dividend of $0.49/share and in 2013 they paid out $3.03/share. We expect dividend growth to continue as the company has a very low payout ratio.

Valuation

It would be hard to consider AB InBev cheap, as it has returned nearly 30% annually over the past three years, but the P/E ratio tells a different story. The trailing 12-Month (TTM) P/E Ratio is 13.6, which is significantly cheaper than its peers Molson and Heineken (19.8 and 22.0, respectively) and less than the overall S&P 500 company average, as of June 26, 2014.

Competition and concerns

In the U.S., the emergence of craft breweries has cut into the revenue of AB InBev’s core brand, Budweiser. Craft beers are sold at premium prices, and their ability to increase distribution and cut costs will lead to higher profits in the future. AB InBev appears to be slow to catch up in the craft-brewing space, but the recent acquisition of Blue Point Brewery, as well as past purchases like Goose Island and Shock Top, should continue their growth in this area. AB InBev is also addressing this concern by focusing their advertising dollars on Corona as a premium product which demands a premium price and higher margins than most of their other brands.

As previously mentioned, AB InBev is an international company that has relied on acquisitions to grow the brand. If we see these acquisitions slow down, we could also see the growth rate slow as well. In the U.S., a Budweiser may be considered more of a staple than a cyclical product, but in many emerging markets, the sale of beer is very much related to GDP. AB InBev is highly reliant on the Latin American market, and their success is dependent on the future growth of these countries.

Recommendation

With the combination of very strong financials, a fairly low valuation, and a high dividend growth rate, AB InBev looks poised to continue their strong growth. Although we are concerned that a potential slowdown in acquisitions and the growth of the craft-beer category could slow revenue growth, AB InBev’s management has shown they are up for the challenge. AB InBev also controls only about 20% of the world market share, so they do have room for growth and further acquisition. We recommend accumulating shares of this company on any significant pullback from current levels.

Now back to that barbeque.

David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found atwww.mainstaycapital.com. Follow him on Twitter@David_Kudla.

Disclosure: Clients and employees of Mainstay Capital Management may hold the securities mentioned in this article in their investment portfolios. The securities mentioned may not be suitable for some investors, based on their tolerance for risk or their investment time horizon.

David
Kudla

David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found at www.mainstaycapital.com. Follow him on Twitter @David_Kudla.

David
Kudla

David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found at www.mainstaycapital.com. Follow him on Twitter @David_Kudla.

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